In re Pfizer Inc. S'holder Derivative Litig..

• Decision Date: 29 April 2011
• Docket Number: Master File No. 09 Civ. 7822(JSR).
• Citation: 780 F.Supp.2d 336
• Parties: In re PFIZER INC. SHAREHOLDER DERIVATIVE LITIGATION.
• Court: U.S. District Court — Southern District of New York

780 F.Supp.2d 336

In re PFIZER INC. SHAREHOLDER DERIVATIVE LITIGATION.

Master File No. 09 Civ. 7822(JSR).

United States District Court, S.D. New York.

April 29, 2011.

Ira M. Press, David E. Kovel, Edward Michael Varga, Kirby McInerney LLP, Gerald H. Silk, Jeroen Van Kwawegen, Mark Lebovitch, Noam Noah Mandel, Bernstein Litowitz Berger & Grossmann LLP, New York, NY, for Plaintiff.Dennis J. Block, Gregory Arthur Markel, Jason Michael Halper, Cadwalader, Wickersham & Taft LLP, New York, NY, for Defendant.

ORDER AND JUDGMENT APPROVING CLASS ACTION SETTLEMENT

JED S. RAKOFF, District Judge.

By Order dated December 14, 2010, the Court granted preliminary approval of the parties' proposed settlement in the above-captioned consolidated shareholder derivative action. The Court's December 14 Order also set forth certain procedures for notifying potential settlement class members, as well as for allowing those class members to object to the settlement's terms. On February 18, 2011, Nora Vides filed a timely objection. After full briefing, the Court held, on March 7, 2011, a “fairness hearing” on the settlement, as well oral argument on plaintiffs' counsel's application for an award of attorneys' fees. After careful consideration, the Court, for the reasons specified below, hereby approves the proposed settlement in all respects and grants plaintiffs' motion for attorneys' fees in its entirety.

The pertinent facts are as follows. On September 2, 2009, Pfizer, Inc. (“Pfizer”) and its subsidiary Pharmacia & Upjohn Company, Inc. (“Pharmacia”) agreed to pay $2.3 billion in penalties and fines to the United States arising from their illegal promotion and marketing of “off-label” uses of several regulated drugs. Pharmacia also pled guilty to violating various sections of the Food, Drug and Cosmetic Act, 21 U.S.C. § 301 et seq., by, inter alia, intentionally introducing misbranded pharmaceutical drugs into interstate commerce. Between September 10, 2009 and October 7, 2009, nine separate complaints were filed by Pfizer shareholders in this Court alleging that the individual defendants, who are current and former Pfizer directors and senior executives, harmed the corporation by causing or permitting this illegal activity to occur. By Order dated October 22, 2009, the Court consolidated these nine complaints into the above-captioned derivative action, and, following a hearing on November 4, 2009, appointed Bernstein Litowitz Berger & Grossmann as lead plaintiffs' counsel.

The consolidated plaintiffs then filed an Amended Verified Derivative Complaint (the “Complaint”) asserting claims on behalf of Pfizer for breach of fiduciary duty, violation of federal proxy rules, and unjust enrichment. Defendants moved to dismiss the Complaint on December 16, 2010. Following motion practice and oral argument, the Court, by Order dated March 17, 2010, dismissed the proxy and unjust enrichment claims, but denied the motion with respect to the breach of fiduciary duty claim. See In re Pfizer, Inc. S'holder Derivative Litig., 722 F.Supp.2d 453, 462–63 (S.D.N.Y.2010). In so doing, the Court noted that the allegations in the Complaint “evidence misconduct of persuasiveness and magnitude, undertaken in the face of the board's own express formal undertakings to directly monitor and prevent such misconduct....” Id. at 462.

In the months following the Court's March 17 Order, the parties engaged in extensive document, deposition, and expert discovery. See Joint Declaration of Mark Lebovitch and David Wales, dated February 7, 2011 (“Lebovich & Wales Decl.”) at ¶¶ 33–58. After contentious disputes over the scope of discovery—which several times necessitated Court intervention—the defendants produced more than 12 million pages of documents to the plaintiffs. Id. ¶¶ 35–42. In addition, the parties took thirty fact depositions and four expert depositions. Id. ¶¶ 53, 58. Finally, the parties collectively retained seven highly-qualified testifying experts, each of whom prepared and served a detailed expert report. Id. ¶¶ 56–57.

Over the course of October and November, 2010, the parties engaged in summary judgment motion practice while, at the same time, entering into extensive settlement negotiations. Id. ¶¶ 64–68. On November 15, 2010, the day that plaintiffs' opposition papers to Pfizer's summary judgment motion were due to be filed, the parties informed the Court that they had reached a proposed settlement agreement, which, after an in-court hearing, the Court preliminarily approved by Order dated December 14, 2010.

The centerpiece of the settlement agreement is its requirement that Pfizer establish and fund a Regulatory Committee, which will have a broad mandate to oversee the company's drug promotion and marketing practices and compliance with regulatory requirements applicable to same. See id. at Ex. A (“Settlement Term Sheet”) at 1. To assist it in serving this oversight role, Pfizer must grant the Committee access to a wide range of information —including drug usage information, health care compliance audits, FDA warning letters, and health care and marketing-related qui tam complaints. See id. at Ex. A (“Corporate Governance Proposal”) at 2. The Committee is to have broad investigative powers, including the authority to require Pfizer management to conduct compliance audits and to commission physician surveys to determine whether Pfizer employees are illegally promoting the company's drugs for off-label purposes. Id. at 4. Further, the Committee must biannually commission an external review of Pfizer's compliance with its regulatory obligations, to be conducted by independent experts, outside counsel, and consultants. Id. Separately, the Committee is to be charged with overseeing the swift adoption of Pfizer's compliance policies by any newly-acquired company. See id. at 3–4.

In addition, the Regulatory Committee is to evaluate whether Pfizer's compensation policies—including the manner in which it structures its employees' sales incentives—are aligned with the company's compliance obligations. See id. at 7. If the Committee encounters serious misconduct in this regard on the part of the company's senior management, compliance personnel, or attorneys, the Committee is required to make written recommendations to Pfizer's Compensation Committee regarding potential “clawback” of previously-awarded incentive compensation. Id. at 7–8.

Structurally, the Regulatory Committee is to consist of at least five members, one of whom should be a member of the Audit Committee,¹ and a majority of whom must be independent directors. Id. at 5. The Chair of the Committee must be an independent director and have relevant experience in law, compliance, regulatory affairs, academia, or service on the board of a health care or other highly regulated company. Id. At least one member of the Committee must have a significant background in the healthcare industry. Id. The Committee is to meet quarterly and must provide a full report of its activities to the Board at least annually. Id. In addition, so that shareholders are informed of its activities, the Committee must prepare a report on its activities, signed by each of the Committee's members, for inclusion in Pfizer's annual report or proxy statement. Id.

To accomplish the foregoing, the proposed settlement requires defendants' insurers to fund a $75 million fund that—after a reduction to satisfy an award of attorneys' fees and expenses in connection with this action, see infra—will be used for the sole purpose of funding the Regulatory Committee's activities. Lebovitch & Wales Decl. ¶ 81. A substantial percentage of the Committee's expenditures will likely be devoted to retaining independent experts to conduct the mandatory biannual external compliance review of Pfizer's activities. See Affidavit of Jeffrey N. Gordon, dated February 7, 2011 (“Gordon Aff.”) ¶ 35. If any funds are remaining after the Committee's initial five-year term, they are to be returned to the insurers, so there is no possibility of Pfizer receiving the money back. Id. ¶ 40. Moreover, if the fund is exhausted before the Committee's initial five-year term is complete, additional funding must be provided by Pfizer upon the Committee's request. Id.

Separately, the proposed settlement requires Pfizer to create an Ombudsman program so as to provide the company's employees with an alternative, confidential means for bringing work-related concerns to the attention of senior management without fear of reprisal. See Corporate Governance Proposal at 6. The Ombudsman will operate a stand-alone office under the direction of Pfizer's Chief Compliance Officer, and is authorized to report his or her concerns directly to the Regulatory Committee. Id. All conversations with the Ombudsman will remain confidential, except where the employee raises an issue that risks harm to an individual or the company or where disclosure is required by law. Id.

The Court now turns to determining whether to grant final approval of the proposed settlement. See Fed.R.Civ.P. 23.1 (shareholder derivative action may only be settled with the Court's approval). Here, as elsewhere, “[t]he central question is whether the compromise is fair, reasonable and adequate.” Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir.1982). But in the context of a derivative action settled on behalf of the class of all shareholders, this requires consideration, in particular, of whether the settlement is the result of arm's-length negotiations in which plaintiffs' counsel has effectively represented the interests of the shareholder class, id. at 74, and whether the substantive terms of the settlement are in the interests of Pfizer and its shareholders relative to “the likely rewards of litigation,” id. at 73–74.

Here, plaintiffs, like defendants, were represented throughout by able and experienced counsel, who engaged in vigorous motion practice and very full discovery that included...